Saturday, February 25, 2017
10:17:53 PM EDT

Defense First

by
Jim Brown

The defense sector has been on fire since the election on expectations for a flurry of new programs and new life for old ones. The Harris Corporation is a communications company. They handle real time military communications of all types. They are the leader in their field.

Harris Corporation provides technology-based solutions that solve government and commercial customers' mission-critical challenges. The company operates in four segments: Communication Systems, Space and Intelligence Systems, Electronic Systems, and Critical Networks. It designs, develops, and manufactures radio communications products and systems, including single channel ground and airborne radio systems, 2-channel vehicular radio systems, multiband manpack and handheld radios, multi-channel manpack and airborne radios, and single-channel airborne radios, as well as wideband rifleman team, ground, and high frequency manpack radios. The company also offers secure communications systems and equipment, including Internet protocol based voice and data communications systems, as well as single-band land mobile radio terminals and multiband radios comprising a handheld radio and a full-spectrum mobile radio for vehicles. In addition, it provides earth observation, environmental, geospatial, space protection, and intelligence solutions, such as sensors and payloads, as well as ground processing and information analytics for security, defense, civil, and commercial customers; and positioning, navigation, and timing products, systems, and solutions. Further, the company offers electronic warfare, avionics, wireless technology, command, control, communications, computers and intelligence, and undersea systems solutions for aviation, defense, and maritime applications. Additionally, it provides managed services that support air traffic management, energy and maritime communications, and ground network operation and sustainment; and information technology and engineering services to government and commercial customers. The company has a collaboration with Boeing for the development of avionics technology for military aircraft. The company was founded in 1895. Company description from FinViz.com.

The reported Q4 earnings of $1.42 compared to estimates for $1.37. Revenue of $1.7 billion missed estimates for $1.76 billion. The company guided for full year earnings of $5.40 to $5.60 per share on revenue of $5.76 to $5.88 billion. Analysts were expecting $5.78 and revenue of $7.16 billion. Harris is known for low balling guidance.

Earnings and guidance were apples and oranges because of several acquisitions and asset sales. Long cycle business were growing along with operating margins. Radio and tactical orders were added to the backlogs. They are using the sale proceeds from various asset sales to pay down debt and invest in future products.

They just received new contracts from the Air Force for navigation payloads for new GPS III satellites. Their actual earnings release is hard to read despite being filled with dozens of new major contracts. All the buyers are classified so there are no names other than "middle east country" "European country" etc. Some are so classified they cannot even disclose that information.

Harris enjoys a unique niche in the defense space. Harris supports more than 100 countries. The company is organized into three business segments: Communication Systems, Space and Intelligence Systems and Electronic Systems.

Earnings are May 4th.

HRS made a new high on Tuesday and then pulled back for two days. Friday saw shares return to the Tuesday high in preparation for a breakout.

Harris has relatively wide spreads. The spread on the option we are using is $1.65x$2.30. As we move farther into the calendar the spreads will tighten. However, that precludes using a stop loss until we have built up some gains.